Applied’s semiconductor system and services revenue from China is about 26% of revenue

Business Strategy & Outlook

Applied Materials is the top vendor of semiconductor fabrication tools. While competitors tend to specialize in a single core competency, Applied competes in almost every key equipment segment with the exception of photolithography. As a result, all major chip makers develop strong relationships with Applied that span multiple process steps of their chip production. The firm is the dominant player in the material deposition and removal areas, among others. Applied boasts an impressive global presence with an installed base of more than 43,000 tools and field service engineers stationed in nearly every leading-edge chip-manufacturing facility in the world. With semiconductor fabrication becoming increasingly complex, resulting in more process steps and new manufacturing technologies, collaboration between chipmakers and equipment providers is set to reach unprecedented levels. Applied is to leverage existing relationships and insights into future customer technology needs to take advantage of the proliferating demand for state-of-the-art chips. The company’s scale and resources allow a research and development budget in excess of $2.7 billion to serve cutting-edge technologies. Recent inflections such as 3D architectures (including 3D NAND and FinFET transistors in logic/foundry) have been enabled by more advanced tools in deposition and removal. As a result, these segments have grown faster than the broader market in recent years, and firms such as Applied have directly benefited, as they can outspend smaller chip equipment firms in R&D to develop relevant solutions and build on existing market leadership.

Beyond semiconductors, Applied is a leading supplier of manufacturing tools for flat-panel displays, including organic light-emitting diodes, or OLED, panels. The cyclical nature of the chip industry and the display market is a ubiquitous threat to equipment suppliers. However, Applied’s expansive product portfolio and large installed base will allow the firm to comfortably weather business cycles over time, and the company is to experience solid growth over the long term.

Financial Strengths

Applied Materials is in a solid financial position. At the end of fiscal 2021, the firm had $5 billion in cash and cash equivalents versus $5.45 billion in long-term debt. The firm typically keeps a substantial cash position on its balance sheet, which is appropriate for chip equipment firms. During cyclical downturns, the cash cushion allows Applied to continue investing heavily in research and development in order to maintain its leading technology and competitive positions. The firm also does share repurchases and dividends to modulate excess cash, which is positive. Specifically, Applied aims to return between 80% and 100% of free cash flow to shareholders.

Bulls Say

Applied Materials is the chip equipment industry’s standard bearer. The firm has the broadest product portfolio and offers customers the closest thing to a one-stop shop.
Applied has been streamlining operations to lower its cost structure and has reinvested some of the savings in R&D while bolstering operating margins.
Applied has benefited from the proliferation of OLED displays, which share manufacturing technologies with those used in semiconductor fabrication. As these displays have become more complex in recent years, demand for Applied’s relevant tools has risen.

Company Description

Applied Materials is the world’s largest supplier of semiconductor manufacturing equipment, providing materials engineering solutions to help make nearly every chip in the world. The firm’s systems are used in nearly every major process step with the exception of lithography. Key tools include those for chemical and physical vapor deposition, etching, chemical mechanical polishing, wafer- and reticle-inspection, critical dimension measurement, and defect-inspection scanning electron microscopes.

(Source: Morningstar)

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